Housing and You…Some financing models for new homes

Oct 19, 2014 News

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By Leonard Gildarie
So the debate is heating up. The questions are many. Where can one find affordable

financing for a new home? How affordable is affordable?
Before we delve into that, I must say that last week I received a lot of calls following the article on Habitat for Humanity’s discussion on affordable housing on which I was included as a panelist. Habitat is located west of Camp Street, on Hadfield Street.
There are, of course, conditions for any kind of arrangements that Habitat would have for persons applying. They will require that you have a piece of land. But it would be best for interested persons to contact them directly and speak to the officers. Each application, because of circumstances, will vary from case to case. In other words, talk to the folks there.
Since that panel discussion over a week ago, I have been doing some research, and there are some conclusions. The first is that in every country in the world there would be persons who would be homeless or will never qualify to own a home under the normal system.
It is a fact. The banking system, because of regulations, just would not be able to cater for everyone. The reasons are simple. There are many who are without a steady job or quite frankly are not earning enough.
Closer to Guyana, a big problem that I worry about all the time is those single-parent families. Because of my job in the media, with the number of murders, accidents and other misfortunes, one cannot help to think that even the Government is unable to properly capture the extent of problems posed by single-parent homes. Many of the affected families do not register with the authorities. I am not sure what systems are in place for the families who live in the far-flung areas in the hinterland.
I can tell of one example that affected me. There is a lady in our street who is a single-parent. She is renting and working as a security guard. Her two kids, both below the age of 10, have to walk to the school, about a mile away. While this appears to be no big deal – as children in the hinterland are known to paddle for miles in their canoe to school – the mother leaves home early in the morning, even before the kids are ready for school. I happen to know that the mother will be unable to use her $50,000 salary to access financing. Her expenses are too much.

AN OPPORTUNITY
In the Latin America and the Caribbean, it is estimated that approximately 40 percent of families live in houses for which they have no title or that lack sewage systems, water, electricity, or proper building materials, according to the Inter-American Development Bank (IDB).
But there are indications of a change in the situation with an increase in purchasing power by the masses. This has paved the way for Governments to explore the different options in the model of housing, and by extension, the financing models for these.
In Guyana, because of the demand for housing, the attention has been more focused on ensuring house lots are available for the masses. Despite large tracts of land on the coast and even in the hinterland being developed for housing, there are still several thousand families awaiting house lots.
The Ministry of Housing has admitted that lands for housing have run out on the East Bank and East Coast of Demerara. Government is now eyeing the Soesdyke/Linden area.
The administration has introduced the remigrant schemes and even allocated lands to private developers to build. Government said that it is subsidizing the price for house lots, as construction of infrastructure, like roads, water and light, put the costs way above what the Central Housing and Planning Authority is charging now for a house lot.
Despite discounts by hardware establishments and a tax programme with the lending institutions that allow interest rates on mortgages to be reduced significantly, there are still many without homes.
Government itself has introduced the low-cost core homes, for just under $2M, and the higher-priced turn-key homes, but these are not enough to meet demands. Which brings us to the question of affordable housing. What are some of the innovative things that can be done to ensure we provide housing for our citizens?
There are many examples or models adopted by countries to assist the vulnerable in their societies, and these can easily be found with a few clicks of a mouse on Google.

SOME MODELS
In Columbia, I have seen some studies on a model that they are employing, called the micro-mortgage business model. The Colombian government is reportedly supporting private sector developers in offering mortgages to families using a multi-faceted credit scoring and savings programme to mitigate risk. Families that fall under an established income threshold can ask for government subsidies to make the initial down payment. Those unable to meet the initial payment can enter into a six- to 12-month savings plan while their home is built.
Another model, called rent-to-own, gives customers the option of signing a formal rental agreement. Families that qualify can occupy homes, and part of their monthly rent goes towards their future mortgage down payment. This option enables clients to build a payment history in the formal financial system through the rental payments while they save to pay for their home. The incremental housing category includes two business models – the core house model and the home improvement model. The core house model – developed by the housing finance company Fomepade in Mexico – targets low-income state workers. Fomepade first helps clients to consolidate and refinance all of their outstanding debt, then extends a housing loan to buy a core house (a newly-built basic house of modular design) or undertake a house improvement. The design of core houses facilitates rapid, low-cost improvements and additions. The financing for this model is provided by government subsidies, the family’s down payment, and Fomepade’s loan. This model is unique, because it links social housing developers, public sector employees, and government subsidy programmes.
According to the Center for Financial Inclusion (CFI) website, the home improvement model has been used by different entities such as microfinance banks, municipal savings and loan funds, and wholesale financing institutions. The publication finds that these groups are increasingly using microfinance lending methodologies to help customers make small (roof, floor, water, etc.) or large (room, second story) improvements to their homes. Besides funding, in partnership with other entities like social housing developers, non-profits, and hardware stores, these institutions provide technical assistance, materials, and labour.
CFI says that what is interesting about these different business models is that they are not only making it easier for customers at the base of the pyramid to buy a home, or slowly build one, but also that in some way they are bringing this customer segment into the formal financial system.
Habitat for Humanity, an experienced non-profit organization itself, has said that affordable housing finance options must satisfy the criteria for affordable housing – housing that targets the economically disadvantaged. Hence, disposable income is a primary factor in determining affordability, and since affordable housing is housing that tries to meet the pockets of those who fall below the median income, accessibility relates to the scope of households that fall into this category, some of which might not even be bankable (do not have stable income). I have already spoken about this.
Now I may have been a little technical with regards to the models of financing, however, it is the hope that Government and other stakeholders seriously look at these models. They could prove to be good initiatives. Incidentally, I have been provided a copy of the Government’s “Housing Policy and Implementation Strategy” which is dated in 2012. With the debates over where Guyana is going, we can examine this, and some more of what Habitat for Humanity is talking about, in the coming weeks.
Enjoy the weekend and keep the calls coming on weekdays to 225-8491 or 682-1256 or drop those emails to [email protected].

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